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Spreadtrum Communications, Inc. (SPRD)

Q3 2012 Earnings Call

November 8, 2012 8:00 p.m. ET

Executives

Leo Li – Chairman and CEO

Shannon Gao – CFO

Analysts

Dan Heyler – Bank of America Merrill Lynch

Bill Lu – Morgan Stanley

Randy Abrams – Credit Suisse

Matt Ramsay – Cannaccord Genuity

Jay Srivatsa – Chardan Capital Markets

Quinn Bolton – Needham & Co.

Jessica Chang – Deutsche Bank

Yolanda Wang – HSBC

Eric Chen – Daiwa Capital Markets

Jack Lu – RBS

Presentation

Operator

Welcome to the Spreadtrum Communications' third quarter 2012 results conference call.

At this time all participants are in a listen-only mode. Following management's prepared remarks, there will be a Q&A session. As a reminder, this conference is being recorded.

Joining the conference today are Dr. Leo Li, Chairman and CEO, and Ms. Shannon Gao, CFO.

Shortly before the start of this conference call, Spreadtrum issued a press release announcing its third quarter 2012 financial results, which is also available along with the quarterly results presentation on the company's IR webpage at ir.spreadtrum.com. This call is also being broadcast live over the internet and will be available on the company's website.

Today's call will include forward-looking statements that involve risks and uncertainties that could cause Spreadtrum's actual results to differ materially from management's current expectations. Such forward-looking statements include, without limitation, statements regarding revenue, cost, profit, competition, customers, products, technologies, partners, business models, M&A, shipments, market share and market trends. Spreadtrum encourages you to review the Safe Harbor Statement contained in today's earnings release as well as the risk factors discussed in its Annual Report on Form 20-F filed on April 10, 2012, as well as other documents filed from time to time with the SEC. The company undertakes no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

Today's call will include a discussion of certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP measures. A reconciliation of the non-GAAP and GAAP reporting for the period discussed can be found in today's earnings release.

All numbers discussed today will be in US dollars unless otherwise noted.

I would now like to turn the call over to Dr. Leo Li. Please go ahead, sir.

Leo Li

Thank you. Welcome, everyone, and thank you for joining us today. I'm pleased to report that Spreadtrum outstanding top-line results in the third quarter, with revenue up $187.9 million, which was above the top end of our guidance. This growth resulted from very strong demand for our TD-SCDMA and EDGE smartphone products. In Q3 we recognized 11 million units in smartphone chipset sales, exceeding our target by 10%. For the year, we now expect more than 30 million smartphone chipsets.

In the domestic China market, TD-SCDMA smartphone demand skyrocketed in the third quarter, fueled by consumer interest in low-cost entry-level devices. Using our highly integrated low-cost smartphone chipset, our customers have defined new market segments, launching TD-SCDMA smartphones that offer an outstanding user experience for only RMB500 to RMB600, which is about $80 to $100 million unsubsidized.

The new low-end segment has very strong appeal to the first-time smartphone consumers. China Mobile which operates a TD-SCDMA network now has close to 700 million subscribers. Each year, more than 200 million of these consumers will be replacing their handsets. This new entry-level smartphone segment will be a strong catalyst for these large numbers of consumers to switch from their older 2.5G handsets to TD-SCDMA smartphones for the next several years.

During the Q3 we also had a robust increase in demand for our EDGE smartphone chipset. The demand for our EDGE smartphone product is coming from the handset market selling to overseas market where 3G networks aren't yet fully deployed. Our customers of EDGE smartphone design activity and shipments to overseas brands are growing rapidly. Much of the demand earlier in this year for EDGE smartphone chipset in China has been from OEMs selling the handsets in domestic China market.

We believe that early EDGE smartphone demand is now shifting to low-cost TD-SCDMA. Entry-level TD-SCDMA smartphones which were not available this year are similar in cost to EDGE smartphones but provide more benefits to the consumers. We expect that the market growth in EDGE smartphones going forward will be more oriented to export markets, and our EDGE smartphone shipments are already focused on the handset market that's starting overseas.

Turning to 2.5G, I am very pleased to report that we're now in the first -- we are now the first Asia-based handset vendor to supply 2.5G-based chipset directly to the number one handset-maker in the world which is Samsung. During Q3 we qualified SC6530, which is our 40nm GPRS and GSM multimedia chipset with Samsung. In the fourth quarter, Samsung's 2.5G handsets with our baseband chipsets have started to ship to consumers around the world. This significant accomplishment expanded our addressable market and demonstrates the quality and maturity of our solutions.

We have various exciting product introduction coming later this quarter and earlier next year. Before I talk about these new products and our long-term growth prospects, I will ask Shannon, our CFO, to review the financial highlights for the third quarter. Shannon?

Shannon Gao

Thank you, Leo.

Total revenue in the third quarter increased 8.5% sequentially and 1.7% year over year to $18791 million, exceeding the top end of our guidance. Gross profit for the quarter was $70.1 million, up 9.1% sequentially and down 9.2% year over year. Gross margin was 37.3%, up from 37.1% in the previous quarter and down from 41.8% in Q3 2011.

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